Pound Sterling rises after hotter-than-expected UK inflation data

Source Fxstreet
Apr 17, 2024 07:10
  • The Pound Sterling recovers above 1.2400 against the US Dollar as UK inflation came in higher than expected in March.
  • UK’s annual headline and core CPI grew by 3.2% and 4.2% in March, respectively.
  • Fed Powell’s hawkish guidance on interest rates has strengthened the US Dollar’s appeal.

The Pound Sterling (GBP) rebounds strongly in Wednesday’s London session as the United Kingdom Office for National Statistics (ONS) reported that the Consumer Price Index (CPI) for March grew more than what economists had expected. Despite beating estimates, inflation has softened from February, suggesting that higher interest rates by the Bank of England (BoE) contribute to abate price pressures. 

Meanwhile, producer price inflation has also slowed, indicating prices of goods and services at factory gates are easing. Business owners generally slash their prices when they expect demand to remain subdued.

Slightly hot inflation figures could put into question expectations that the BoE will cut rates in August, although Tuesday’s employment data suggested that the UK’s job market is cooling. The labor market report showed that the Unemployment Rate rose sharply to 4.2% in three months ending February from expectations of 4.0% and the prior release of 3.9%. The number of employed people fell by 156K in the three months to February, more than the 89K jobs lost in the quarter to January. 

Daily digest market movers: Pound Sterling recovers even as US Dollar remains firm

The Pound Sterling bounces back to 1.2460 as the United Kingdom ONS reports higher-than-expected inflation rate for March. Annual headline inflation rose 3.2%, higher than expectations of 3.1% but slowing from the prior reading of 3.4%. Monthly headline inflation grew steadily by 0.6%.

UK’s annual core CPI data, which strips off volatile food and energy prices, grew by 4.2%, more than the 4.1% expected, but significantly decelerating from February’s reading of 4.5%. The core inflation data is the Bank of England’s preferred inflation measure for decision-making on interest rates. even as the measure came in slightly higher than expected, it clearly shows that price pressures are on course to return to BoE’s desired rate of 2%.

March’s inflation data is unlikely to significantly influence speculation for the BoE pivoting to rate cuts, which financial markets are currently expecting from November, according to rate future markets, Reuters reports. 

On the global front, dismal market sentiment due to worsening Middle East tensions and a hawkish interest rate guidance from Federal Reserve Chair Jerome Powell has been maintaining downward pressure on risk-sensitive assets. S&P 500 futures are posting some losses. 

Fears of further escalation in Iran-Israel tensions have deepened as Israel vowed to retaliate against Iran’s attack. The US said it is prepared to impose sanctions on Iran.

The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, hovers near a fresh five-month high around 106.40. The USD Index is expected to extend its upside as Fed Powell said on Tuesday that there is a need to hold interest rates higher for longer given strong labor demand and slowed progress in inflation declining to the desired rate of 2%.

Technical Analysis: Pound Sterling finds cushion near 1.2400

The Pound Sterling exhibits a firm footing after the release of the UK inflation report for March. The GBP/USD pair sees strong buying near the crucial support at 1.2400. The upside in the Cable is seen limited near the psychological resistance of 1.2500. This coincides with the breakdown region of the Head and Shoulder chart formation on the daily time frame. 

The long-term outlook turns bearish as the Cable drops below the 200-day Exponential Moving Average (EMA), which trades around 1.2560.

The 14-period Relative Strength Index (RSI) shifts into the bearish range of 20.00-40.00, suggesting an active downside momentum.

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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